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How Much Should Your Clients Save for Retirement?

(Bloomberg) --It's hard to plan for retirement, and one of the trickiest questions is: How much should I save?

The honest answer is: It depends. "The best-laid plans can be undone by a messy divorce, a disabling disease, or a stock market crash," Jonathan Skinner, a professor of economics at Dartmouth College, wrote in a study on the topic. Your future health-care expenses are almost impossible to predict, for example, especially as Congress considers big changes to the system.

But "it depends" is no help to millions of American workers, who aren't experts in finance and just want to know what to do. Uncertainty can be paralyzing, leading people to believe retirement is impossible and discouraging them from even starting to save. Many are getting the wrong impression from their employers' 401(k) plans, which often default workers into saving far too little.

We contacted more than a dozen retirement experts, across industry and academia, asking for a simple rule of thumb. How much, we asked, should people be saving in a 401(k) retirement plan, as a percentage of their income?

The experts disagreed.

So instead of one rule, here are seven, each with pros and cons we outline to help you save for retirement as thoughtfully and effectively as possible.

Listen to your employer.

Pro: It's easy, especially if your employer is one of the many now automatically signing workers up for a retirement plan.

Con: Automatic 401(k)s typically start out by setting aside just 3 percent of employees' income. That's way too little. Why don't companies push workers to save more? Because many match employee 401(k) contributions, and it can cost them more if workers save more. Plus, many employers assume workers will be annoyed by higher default savings rates.

Neither is a good excuse. Formulas for matching contributions can be be adjusted, and employees are about as willing to accept a 6 percent default savings rate as a 3 percent rate, a recent Morningstar study of plan data finds. Very few employers have a rate higher than 6 percent, so it's hard to know what the upper limit is. Another Morningstar survey suggests workers could accept saving rates as high as 12 percent.

"People tend to accept the default," said David Blanchett, Morningstar's head of retirement research. "We need to recommend folks save more."

Save 12 percent to 15 percent of your salary.

Pro: If you're looking for a basic rule of thumb, this is one many experts agree with. "The absolute minimum is 12 percent," Blanchett said. "It's probably closer to 15 percent."

This guideline, like the others here, counts 401(k) contributions coming from both employees and employers. A worker saving 8 percent of her own money reaches the 12 percent goal if her company pitches in 4 percent.

Con: As a rule, it's almost too simple—see the many examples below. The advice is usually based on conservative assumptions about your investment returns. Many experts expect lower returns in the future than over the past few decades, but they could be wrong—predicting the market is notoriously difficult. You could also get lucky and do better than average.

Putting 12 percent to 15 percent in a 401(k) may be unrealistic for workers who have other pressing priorities. When you're young, those include paying down high-interest-rate debt and building up an emergency cash fund. When you're older, a key goal should be paying off your mortgage, Skinner said, because it makes retirement much less expensive.

Base it on how much you make.

Pro: Because of Social Security, lower-income people can get away with saving less, as a percentage of their income, than wealthier Americans. The program, which delivers an average check of $1,360 to 41 million retirees each month, bases its benefits on how much a worker earns over a career, but there are minimum and maximum benefit amounts. Social Security will replace more of a lower-income retiree's income, while higher-income retirees need more savings if they want to live the same lifestyle as when they were working.

Given this difference, Gary Burtless, a senior fellow at the Brookings Institution, offers a revised rule of thumb: A middle-income American, earning roughly $30,000 to $75,000 a year, should start out saving 10 percent to 12 percent of his income. Around age 50, he should reassess. Online calculators, and the Social Security website, can help. "If it looks like they're falling short, they should boost their savings rate to 15 to 20 percent," Burtless said.

People making less than $30,000 can save less than 10 percent to 12 percent; those who make more than $75,000 should save more. "Start at 15 percent and plan on ramping up to 20 percent or more" by the time children graduate from college, Burtless said. "Upper-middle-class earners have a bigger gap to fill."

Con: There are reasons lower-income Americans might need more money saved, while upper-income workers might need less. Well-paid, well-educated workers often find it easier, and more enjoyable, to continue working well past the traditional retirement age. Lower-income workers can have a difficult time working all the way to Social Security's full retirement age, if they lose their jobs or their health deteriorates.

Base it on your job prospects.

Pro: The amount you need to save varies a lot with when you started saving and when you want to retire. If you're a middle-income earner who begins saving at 25 and wants to retire at 62, you need to save 15 percent of your salary, Boston College's Center for Retirement Research calculates. By working to age 70, you need to save just 4 percent. Those eight years of saving, rather than spending, make a huge difference.

But many workers get pushed into retirement by layoffs. And some jobs in some industries are much more volatile than others. "Investment bankers should save a lot, because they could be out of a job next week," said Anthony Webb, research director at the New School for Social Research's Schwartz Center for Economic Policy Analysis. "So should construction workers, whose earnings peak at relatively young ages." A doctor can make a generous salary for decades.

People should save more if they're in cyclical industries with periods of booms and busts, said Scott Cederburg, a finance professor at the University of Arizona. He cites real estate, oil, technology, and finance as examples.

Con: Economic change is unpredictable. It's not easy to forecast which jobs and industries are about to be disrupted and which job skills will still be valuable in 20 or 30 years. Is a robot going to take your job?

Base it on your gender.

Pro: Women tend to live longer than men, so their retirements tend to be more expensive. "Women are also likely to take more time off from the workplace, so they have a greater need to save earlier and save more," said Jamie Kalamarides, Prudential Retirement's head of full-service solutions.

Con: For planning purposes, the averages are only so useful. For example, many men live into their 90s.

Just save as much as possible.

Pro: With so much uncertainty affecting your career, the economy, and the markets, why not just set aside as much as you possibly can?

"Most people should strive to save the maximum deductible amount," said Diane Garnick, chief income strategist at TIAA. In 2017, for a 401(k), that's $18,000 a year, with a $6,000 "catch-up" contribution for workers 50 and older. You can put $5,500 in an individual retirement account, or IRA, too.

Con: Locking up too much money in retirement accounts gives you less financial flexibility. If you need the money before you're 59 and a half, you'll pay a penalty.

And unless your goal is merely being as wealthy as possible, there's a downside to saving too much: Life is short. If you're too frugal, you'll never learn how to enjoy your money—a surprisingly common phenomenon among retirees.

Just start saving.

Dive in and save at least enough to take advantage of your employer's matching contribution. This may be the only no-brainer in retirement planning. If your employer matches your 401(k) contribution, that's "free money," said Barry Kozak of October Three Consulting LLC. Even if it isn't ultimately enough to live on, it gets you started. "Just getting into the habit of saving via payroll is critical," said John Scott of the Pew Charitable Trusts.

It's encouraging, and disturbing, to note that by doing so you're already a step ahead of most American workers, who are skating toward retirement on very thin financial resources. Two-thirds don't contribute to a 401(k), because they don't have access to a plan—or simply aren't signing up for one.